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Nov 12, 2013 (3 years and 7 months ago)

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Information Systems:

A Manager’s Guide to Harnessing Technology

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Chapter 8

Facebook:

Building a Business from

the Social Graph

2010


Age 26

Learning Objectives


Be familiar with Facebook’s origins and rapid rise


Understand how Facebook’s rapid rise has impacted the firm’s ability to
raise venture funding and its founder’s ability to maintain a controlling
interest in the firm


Recognize that Facebook’s power is allowing it to encroach on and envelop
other Internet businesses


Understand the concept of the “dark Web” and why some feel this may
one day give Facebook a source of advantage vis
-
à
-
vis Google

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Learning Objectives


Understand the basics of Facebook’s infrastructure, and the costs required
to power the effort


Recognize the two strategic resources that are most critical to Facebook’s
competitive advantage and why Facebook was able to create these
resources while MySpace has fallen short




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Learning Objectives


Appreciate that while Facebook’s technology can be easily copied,
barriers to sustain any new entrant are extraordinarily high, and the
likelihood that a firm will win significant share from Facebook by doing
the same thing is considerably remote


Understand the concept of feeds, why users rebelled against it, and why
users eventually embraced this feature


Recognize the role of feeds in viral promotions, catalyzing innovation, and
supporting rapid organizing


Understand how Facebook created a platform, and the potential value this
offers the firm

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Learning Objectives


Recognize that running a platform also presents a host of challenges to
the platform operator


Describe the differences in the Facebook and Google ad models


Explain the Hunt versus Hike metaphor, contrast the relative success of ad
performance on search compared to social networks, and understand the
factors behind the latter’s struggles


Recognize how firms are leveraging social networks for brand and product
engagement, be able to provide examples of successful efforts, and give
reasons why such engagement is difficult to achieve

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Learning Objectives


Understand the difference between opt
-
in and opt
-
out efforts


Recognize how user issues and procedural implementation can derail even
well
-
intentioned information systems efforts


Recognize the risks in being a pioneer associated with new media efforts,
and understand how missteps led to Facebook and its partners being
embarrassed (and in some cases sued) by Beacon’s design and rollout
issues


Understand the extent and scope of the predator problem on online social
networks

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Learning Objectives


Recognize the steps firms are taking to proactively engage and limit these
problems


Describe Facebook’s efforts to integrate its service with other websites,
and the potential strategic benefit for Facebook and for its partners


List and discuss the potential benefits and risks of engaging in the kinds of
inter
-
site sharing and collaboration efforts described in this section


Question the fifteen
-
billion
-
dollar valuation so often cited by the media.


Understand why Microsoft might be willing to offer to invest in Facebook
at a higher valuation rate

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Introduction


Facebook was started by Mark Zuckerberg, a Harvard drop
-
out


Just two weeks after Facebook launched, the firm had four thousand users
and ten months later it was up to one million


As growth skyrocketed, Facebook built on its stranglehold of the college
market (85 percent of four
-
year college students are Facebook members),
opening up next to high school students, then to everyone


In 2006, Microsoft locked up the right to broker all banner ad sales that
run on the U.S. version of Facebook, guaranteeing Zuckerberg’s firm one
hundred million dollars each year through 2011

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Introduction


In 2007, Microsoft bought 1.6 percent of the firm for two hundred forty
million dollars


By spring 2009, Facebook had more than twice MySpace’s monthly unique
visitors worldwide


By June, Facebook surpassed MySpace in the United States


By July, Facebook was cash
-
flow positive


By February 2010, the firm had over 400 million users, more than doubling
in size in less than a year

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Why Study Facebook?


In Facebook’s case, there are a lot of folks with a vested interest in
figuring out where the firm is headed


If you want to work there, are you signing on to a firm where your
stock
options

and
401k

contributions are going to be worth something or worthless?


If you’re an investor and Facebook goes public, should you short the firm or
increase your holdings?


Would you invest in or avoid firms that rely on Facebook’s business?

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Why Study Facebook?


Should your firm rush to partner with the firm?


Would you extend the firm credit? Offer it better terms to secure its growing
business, or worse terms because you think it’s a risky bet?


Is this firm the next Google, the next GeoCities, or the next Skype?



Microsoft acquired Skype, the leading Internet communications company, for
$8.5 billion in cash from the investor group led by Silver Lake.


http://www.microsoft.com/presspass/press/2011/may11/05
-
10corpnewspr.mspx


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Zuckerberg Rules!


Many entrepreneurs accept startup capital from venture capitalists


Venture capitalists (VCs):
Investor groups that provide funding in exchange for
a stake in the firm and a degree of managerial control usually in the form of a
voting seat or seats on the firm’s board of directors


Board of directors
: Group assigned to govern, advise, and provide oversight
for the firm


The earlier a firm accepts VC money, the more control these investors can
exert

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Zuckerberg Rules!


VCs have deep entrepreneurial experience, a wealth of contacts, and can
offer important guidance and advice


But strong VCs can oust a firm’s founder and other executives if they’re
dissatisfied with the firm’s performance

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Zuckerberg Rules!


At Facebook, Zuckerberg owns an estimated 20 percent to 30 percent of
the company, and controls three of five seats on the firm’s board of
directors


He’s virtually guaranteed to remain in control of the firm, regardless of what
investors say


Maintaining this kind of control is unusual in a start
-
up, and his influence
is a testament to the speed with which Facebook expanded


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What’s the Big Deal?


Between December 2008 and 2009, Facebook was adding between six
hundred thousand and a million users a day


Roughly half of Facebook users visit the site every single day, with the
majority spending fifty
-
five minutes or more getting their daily Facebook
fix


Users thirty
-
five years and older, account for more than half of Facebook’s
daily visitors and its fastest growing population


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What’s the Big Deal?


The integrated set of
Facebook

services
encroaches

on a wide swath of
established Internet businesses


It is the first
-
choice messaging and chat service for a generation


It is now the biggest
photo
-
sharing site
on the Web, taking in some three
billion photos each month


Facebookers

share eight million videos each month


Facebook

is a kingmaker, opinion catalyst, and traffic driver

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What’s the Big Deal?


Facebook

rolled out the document collaboration and sharing service
Docs.com

in a partnership with Microsoft


Facebook

is hard at work on its own
e
-
mail system


Facebook

has announced its intention to offer its own search engine with
real
-
time access to up
-
to
-
the
-
minute results from status updates, links,
and other information made available to you by your friends

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What’s the Big Deal?


Facebook is political


The site is considered such a powerful force that China, Iran, and Syria are among
nations that have attempted to block Facebook access within their borders


Egyptians have used the site to protest for democracy


Saudi women have used it to lobby for driving privileges


ABC News cosponsored U.S. presidential debates with Facebook


Facebook co
-
founder, Chris Hughes, was recruited by the Obama campaign to create
my.barackobama.com, a social media site considered vital in the 2008 U.S. presidential
victory


Ghonim, a marketing manager for Google, played a key role in
organizing the January
25 protest

by reaching out to
Egyptian youths on Facebook
. Shortly after that first
protest, Ghonim was arrested.

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So What’s it Take to Run This Thing?


The Facebook cloud is scattered across multiple facilities


Cloud
: A collection of resources available for access over the Internet


The innards that make up the bulk of the system aren’t that different
from what you’d find on a high
-
end commodity workstation


Much of what powers the site is open source software (OSS)


Open source software (OSS)
: Software that is free and where anyone can look
at and potentially modify the code


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So What’s it Take to Run This Thing?


A good portion of the code is in PHP


The databases are in MySQL


The object cache that holds Facebook’s frequently accessed objects is in
chip
-
based RAM instead of on slower hard drives


It is managed through the open source product called Memcache


Other code components are written in a variety of languages, including
C++, Java, Python, and Ruby, with access between these components
managed by a code layer the firm calls Thrift

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So What’s it Take to Run This Thing?


Estimates suggest the firm spends:


One million dollars a month on electricity


Half million a month on telecommunications bandwidth


At least fifteen million dollars a year in office and data center rental payments

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The Social Graph


Social graph is the global mapping of users, organizations, and how they
are connected


Through Facebook, you’re connected to other users (your friends), photos
about you are tagged, comments you’ve posted carry your name, you’re a
member of groups, and you’re connected to applications you’ve installed

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The Social Graph


While MySpace and Facebook are often mentioned in the same sentence,
from their founding, these sites were conceived differently


MySpace was founded by musicians seeking to reach out to unknown users and
make them fans


Facebook was conceived as a place where you could reinforce contacts among
those who, for the most part, you already knew


Facebook’s distinguishing feature


Its “realness”


This brought along with it a degree of safety and comfort that enabled
Facebook to become a true social utility and build out a solid social graph
consisting of verified relationships

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The Social Graph


Because of trust, Facebook’s social graph is stronger than MySpace’s


There is a strong network effect to Facebook


Network effects
: When the value of a product or service increases as its
number of users expands


The switching costs for Facebook are extremely powerful


Switching costs
: The cost a consumer incurs when moving from one product to
another

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Facebook Feeds

Ebola for Data Flows


With feeds, each time a user performs an activity in Facebook, the feed
blasts this information to all of your friends in a reverse chronological list
that shows up right when they next log on


Feeds are the linchpin of Facebook’s ability to strengthen and deliver user
value from the social graph


Feeds were first seen by many as a viral blast of digital nosiness


a
release of information users hadn’t consented to distribute widely


Zuckerberg apologized, explaining how users could opt out of feeds


As it turned out, a lot of people really liked the feeds and found them
useful

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Facebook as a Platform


In May 2007, at a conference called F8, Mark Zuckerberg announced that
he was opening up the screen real estate on Facebook to other application
developers


Facebook published a set of application programming interfaces (APIs)
that specified how programs could be written to run within and interact
with Facebook


Application programming interfaces (APIs)
: Programming hooks, or guidelines
published by firms that tell other programs how to get a service to perform a
task such as send or receive data


Any programmer could write an application that would run inside a user’s
profile

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Facebook as a Platform


Developers can charge for their wares, offer them for free, and even run
ads


Facebook let developers keep what they made


A key distinction: MySpace initially restricted developer revenue on the
few products designed to run on their site, at times even blocking some
applications


The choice was clear, and developers flocked to Facebook


To promote the new apps, Facebook runs an applications area on the site
where users can browse offerings

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Facebook as a Platform


Each application potentially added more value and features to the site
without Facebook lifting a finger


Some applications were accused of spamming friends with invites to install
them


There were security concerns and apps that violated the intellectual
property of other firms

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Facebook as a Platform


Legitimate questions remain:


Are Facebook apps really a big deal?


Just how important will apps be to adding sustained value within Facebook?


And how will firms leverage the Facebook framework to extract their own
value?


There are suggestions that a lot of applications are faddish time wasters

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Advertising and Social Networks: A Work in
Progress


Facebook makes its money from advertising


For years, online advertising has been the only major media category that
has seen an increase in spending


Firms spend more advertising online than they do on radio and magazine ads


But not all Internet advertising is created equal


There are signs that social networking sites are struggling to find the right
ad model



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Advertising and Social Networks: A Work in
Progress


Problems advertising on social networks include content adjacency, and
user attention


Content adjacency
: Concern that an advertisement will run near offensive
material, embarrassing an advertiser and/or degrading their products or brands


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Attention Challenges: The Hunt Versus The
Hike


In terms of revenue model, Facebook is radically different from Google
and the hot
-
growth category of search advertising


Users of Google and other search sites are on a
hunt


a task
-
oriented
expedition to collect information that will drive a specific action


Search users want to learn something, buy something, research a problem,
or get a question answered

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Attention Challenges: The Hunt Versus The
Hike


Google only charges text advertisers when a user clicks through


If there are no clicks the ad runs at no cost to the firm


Users click on Google ads enough for this to be the single most valuable
activity among
any
Internet firm


While users go to Google to hunt, they go to Facebook as if they were
going on a
hike


they have a rough idea of what they’ll encounter, but
they’re there to explore, look around, and enjoy the sights (or site)


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Attention Challenges: The Hunt Versus The
Hike


Most banner ads don’t charge per click, but rather via something called
CPM


CPM
: Cost per thousand impressions

billing mechanism often used in online
display advertising (as well as by other media)


Facebook banner ads performed so poorly that the firm pulled them in
early 2010


Facebook ads sell for much less



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Getting Creative with Promotions: Does It
Work?


Facebook has begun to experiment with relatively new forms of
advertising like engagement ads


Engagement ads
: Promotion technique popular with social media that
attempts to get consumers to interact with an ad, then shares that action with
friends


Facebook competes with its own widget makers


Jupiter Research surveyed marketers trying to create a viral impact online
and found that only about 15 percent of these efforts actually caught on
with consumers


Brands seeking to deploy their own applications in Facebook have
struggled

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Reputation Damage and Increased Scrutiny

The Facebook TOS Debacle


Facebook suffered damage to its reputation; reinforcing perceptions that
the company acts brazenly, without considering user needs, and is fast
and loose on privacy and user notification


Beacon was a fiasco


Now users, the media, and watchdogs are on the alert


When the firm modified its terms of service (TOS) policy in spring 2009,
the uproar was immediate


This new TOS was offered in a way that solicited user comments, and it
was submitted to a community vote, considered binding if 30 percent of
Facebook users participated

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Reputation Damage and Increased Scrutiny

The Facebook TOS Debacle


In Facebook’s defense, the broad TOS was probably more a form of legal
protection than any nefarious attempt to exploit all user posts ad
infinitum


Managers must learn that their actions are now subject to immediate and
sustained review, and that violation of the public trust will have
consequences

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Predators and Privacy


In October 2007, Facebook became an investigation target


Officials from the New York State Attorney General’s office had posed as
teenagers on Facebook and received sexual advances


Complaints to the service from investigators posing as parents were also not
immediately addressed


These were troubling developments for a firm that prided itself on trust and
authenticity


In a 2008 agreement with forty
-
nine states, Facebook offered aggressive
programs, many of which put it in line with MySpace


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Predators and Privacy


Facebook agreed to take several actions including:


Responding to complaints about inappropriate content within twenty
-
four
hours and allowing an independent examiner to monitor how it handles
complaints


Imposing age
-
locking restrictions on profiles and reviewing any attempt by
someone under the age of eighteen to change their date of birth


Making profiles of minors no longer searchable


Automatically sending a warning message when a child is at risk of revealing
personal information to an unknown adult


Banning links to explicit material, the most offensive Facebook groups, and any
material related to cyber bullying

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One Graph to Rule Them All: Facebook Takes
Over the Web


In Spring 2010, during the firm’s annual f8 Developers Conference,
Facebook launched a series of initiatives that placed the company directly
at the center of identity, sharing, and personalization


not just on
Facebook, but across the web


With just a few lines of HTML code, any developer could add a Facebook
“Like” button to their site and take advantage of the power of viral
distribution


It also offered a system where websites operators can choose to accept a
user’s Facebook credentials for logging in


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One Graph to Rule Them All: Facebook Takes
Over the Web


Facebook lets websites embed some Facebook functionality right on their
pages


Other efforts allow firms to leverage Facebook data to make their sites
more personalized


These features enlist web sites to serve as vassal states in the Facebook
empire

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More Privacy Controversy


The decision to launch new features as “opt
-
out” instead of “opt
-
in”
immediately drew the concern of lawmakers


Opt
-
out guarantees the largest possible audience and that’s key to
realizing the benefits of network effects, data, and scale


Making efforts opt
-
in creates the very real risk that not enough users will
sign up and that the reach and impact of these kinds of initiatives will be
limited

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Free
-
Riders and Security Concerns


Facebook allows third
-
party developers to create all sorts of apps to
access Facebook data


There are major challenges with a more open approach


Weakening of strategic assets


Revenue sharing


Security

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Social Networking Goes Global


Facebook will see stellar growth start to slow as the law of large numbers
sets in


The shift from a growth business to a mature one can be painful, and for
online firms it can occur relatively quickly


Facebook’s crowdsourcing localization effort helped the firm rapidly
deploy versions in dozens of markets, blasting the firm past MySpace in
global reach


Crowdsourcing
: The act of taking a job traditionally performed by a
designated agent (usually an employee) and outsourcing it to an undefined
generally large group of people in the form of an open call

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Is Facebook Worth It?


Facebook’s often
-
cited fifteen
-
billion
-
dollar valuation from the fall of
2007 Microsoft investment is rich by most standards


But the math behind the deal is a bit more complex


The deal was done in conjunction with an agreement that for a time let
Microsoft manage the sale of Facebook’s banner ads worldwide


Microsoft’s investment was done on the basis of preferred stock, granting the
firm benefits beyond common stock


Microsoft purposely inflated the value of Facebook in order to discourage rival
bidders

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Is Facebook Worth It?


Google may be the only firm with that could possibly launch a credible
bid, and Zuckerberg is reported to be genuinely uninterested in being
absorbed by them


Since the fall of 2007, several others have invested private money into
Facebook including:


The Founders Fund and Li Kai Shing, the Hong Kong billionaire behind
Hutchison Whampoa


In May 2009 Russian firm Digital Sky paid two hundred million dollars for 1.96
percent of the firm in preferred stock


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Is Facebook Worth It?


Despite the headlines, even at the time of the Microsoft investment,
Facebook was almost certainly not valued at a pure fifteen billion dollars


Raising more capital enables Zuckerberg to pursue acquisitions


Facebook struggles to try to leverage its friend networks


Time will tell if Facebook’s competitive assets and constant innovation are
enough to help it avoid the fate of those that have gone before them


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http://money.cnn.com/2011/06/24/technology/facebook_winklevoss/index.htm?iid=HP_River